DIGITALTOWN, INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Edgar Glimpses Via Acquire Media NewsEdge) The following is a discussion of the financial condition of the Company as of
May 31, 2014, and its results of operations for the three month ended May 31,
2014 and 2013, which should be read in conjunction with, and is qualified in its
entirety by, the financial statements and notes thereto included elsewhere in
this report and the audited consolidated financial statements and notes thereto
included in the Company's Form 10-K for the fiscal year ended February 28, 2014.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Form 10-Q for the quarter ended May 31, 2014, contains forward-looking
statements. Forward-looking statements may be identified by the use of
forward-looking terminology, such as "may," "shall," "could," "expect,"
"estimate," "anticipate," "predict," "probable," "should," "continue," or
similar terms, variations of those terms or the negative of those terms. The
forward-looking statements specified in the following information have been
compiled by our management and are considered by management to be reasonable.
Our future operating results, however, are impossible to predict and no
representation, guaranty, or warranty is to be inferred from those
DigitalTown owns and operates a nationwide social networking site of hyper-local
on-line communities built around their domain names and the schools and
communities they represent.
In March 2013, DigitalTown filed a trademark application with the U.S. Patent
and Trademark Office for the service mark "America's Prodigy". The Company is
the holder of Americasprodigy.com and various other prodigy related domain
names. The application lists its goods and services as entertainment services,
namely, conducting contests.
In February 2013, public registration began for TrustedWebmail, DigitalTown's
webmail platform. TrustedWebmail features advanced monitoring controls for
schools, athletic directors, youth leagues and business and will provide an easy
method for monitoring emails sent and received. DigitalTown plans to launch a
second tool called Trusted Cell Phone, which is a predator-averse
parental/coach/teacher monitoring application which allows you to monitor all
texts (SMS or MMS), phone calls, or images into or out of any android based
cellular phone under your control.
On July 31, 2012, DigitalTown and the National Interscholastic Athletic
Administrators Association ("NIAAA") jointly announced that TrustedWebmail will
be the official recommended email provider of the NIAAA for athletic
administrators, coaches and athletes nationwide.
On May 23, 2012, DigitalTown and The Active Network, Inc. ("Active") completed a
Handoff Agreement of the technology assets supporting DigitalTown's school
spirit websites and its related social networking sites. The Handoff Agreement
indicates that both DigitalTown and Active agreed to mutually terminate the
Strategic Alliance Agreement, initially entered between the parties on September
29, 2009, and subsequently re-entered between the parties on September 30, 2011.
On May 14, 2012, DigitalTown Limited ("DTL") was incorporated under Chapter 32
of the Laws of Hong Kong. DTL is 100% owned by TSN.
On May 3, 2012, DigitalTown created a new, wholly-owned subsidiary, The School
Network, Inc. ("TSN"), under the laws of the State of Nevada.
On April 4, 2012, the Company executed a Domain Sale Agreement under which it
agreed to sell one of the domain names the Company currently owns. The Company
received $175,000 cash in consideration of the transfer of the domain name.
RESULTS OF OPERATIONS
THREE MONTHS ENDED MAY 31, 2014 and 2013
During the three months ended May 31, 2014, the Company recorded revenues of
$200 and cost of revenues of $45,623 for a gross loss of $(45,423) compared to
revenues of $309 and cost of revenues of $81,197 for a gross loss of $(80,888),
for the same period in 2013. For the three months ended May 31, 2014 and 2013,
revenue mainly consisted of commissions generated from advertising on our
websites. Cost of revenue consisted of amortization of prepaid annual domain
name renewal fees of $45,613 for 2014 compared to $49,008 for 2013,
server/bandwidth expense of $10 for 2014 and $1,393 for 2013, amortization of
website development fees were $0 for 2014 and $27,342 for 2013 and direct sales
expense of $0 for 2014 compared to $3,454 for 2013. The decrease of $27,342 in
amortization of website development fees between the two periods is due to the
Company recording an impairment charge of $58,625 for the total net value of its
Intangible assets - website development costs at February 28, 2014.
Selling, general and administrative expenses for the most current three months
decreased by $433,317 to $134,867 compared to a year ago. Stock compensation
expense, included in selling, general and administration expenses, was $59,417
for the three months ended May 31, 2014, compared to $383,789 for the three
months ended May 31, 2013, a decrease of $324,372, compared to a year ago.
Excluding non-cash stock compensation expense for the two comparable periods,
selling, general, and administrative expenses were $75,450 for the three months
ended May 31, 2014, compared to $184,395 for the three months ended May 31,
2013. The decrease of $108,945 was primarily due to a decrease in salary
expense of $68,379, a $15,275 decrease in professional fees and a decrease in
employee benefits cost of $12,690. The Company's overall net loss for the
current three months decreased by $484,249 to $180,237.
LIQUIDITY AND CAPITAL RESOURCES
THREE MONTHS ENDED MAY 31, 2014
The Company's cash position at May 31, 2014, was $7,134, a decrease of $43,455
from $50,589 at February 28, 2014. Net cash used in operating activities during
the three months ended May 31, 2014 and 2013, was $128,455 and $236,201,
respectively. When comparing the two periods, the decrease in cash used in
operating activities of $107,746 is mainly due to a decrease of $117,476 in cash
operating expenses and an increase in related party accounts payable of $35,640.
Net cash used in investing activities for the three months ended May 31, 2014,
was $0 as compared to net cash used of $3,733 for the three months ended May 31,
2013, of which $3,330 was used for the cost of website development and $403 for
the purchase of domain names.
Net cash provided by financing activities for the three months ended May 31,
2014, was $85,000 which consisted of payments received from related parties of
$75,000, payments received on stockholder subscription
receivables of $5,000 and proceeds from the issuance of stock of $5,000. For the
comparable period ended May 31, 2013, the Company had net cash provided by
financing activities of $217,722 which consisted of proceeds from note payable
of $150,000, payments received on stockholder subscription receivables of
$68,000 offset by payments of $278 on loan from director/stockholder.
Monthly cash operating expenses for the three months ended May 31, 2014, were
approximately $40,000 per month. Based on current projections, the Company's
monthly cash operating expenses going forward should remain at approximately
$40,000 per month which includes the monthly cost for the renew of the existing
domain names of approximately $15,000. In addition to the normal monthly
operating expenses, the Company's committed cash requirements for the twelve
months ending February 28, 2015, include the balance due of $30,000 for expenses
pertaining to the Company's Strategic Partnership Agreement with the NIAAA and
$22,500 pertaining to the Company's software development maintenance agreement.
From June 1, 2014 to July 21, 2014, the Company has not received any cash
proceeds from stock subscription receivables.
As of May 31, 2014, the Company has the following stock subscription agreements
On October 5, 2007, the Company received subscriptions for 1,300,000 restricted
common shares at $2.50 per share (total value of $3,250,000). Significant terms
of the original subscription agreement are as follows:
The price per share of $2.50 was based on the closing price on October 4, 2007.
At 24 months, 1/36 payments are due monthly.
The Company, at its option, may call up to 1/12 of the gross receivable per
month if the preceding 30 day average trading price is at or above $7.00 a share
with minimum trading volume of 5,000 shares per day.
If the purchaser sells these common shares, the purchaser shall be entitled to
an amount equal to 200% of the original purchase price of each share and the
Company shall be entitled to 50% of any additional net sales proceeds from the
On February 25, 2010, due to the economic downturn and the market value decline
of the Company's stock, which was trading below $2.50 per share, the Company
amended the pricing terms of the subscription agreements received by the Company
on October 5, 2007. The amendment changed the following significant terms of
the subscription agreement:
The parties agree that the Initial Pricing terms in the Confidential Binding
Term Sheet dated October 5, 2007 of the Agreement will be amended to state as
The Subscriber offers to purchase shares of the Company for $0.75 per share.
After the price adjustment, the revised total value of this subscription
agreement is $975,000.
The following other provisions of the Initial Pricing and Final Pricing terms in
the Confidential Binding Term Sheet dated October 5, 2007 of the Agreement will
be deleted, and are not enforceable by either party:
Beginning October 5, 2009, and 1/36 payments are due each month thereafter on
the 5th of every month.
The Company at its option may call up to 1/12 of the (gross) receivable note per
month if the preceding 30 day average trading price is at or above $7.00 a
share. Minimum trading volume must be 5,000 shares a day.
As total consideration for the purchase and sale of the Company's stock,
purchaser shall ultimately pay to the Company the following amount (the
Purchaser shall first be entitled to an amount equal to 200% of the face amount
of each share.
After the purchaser receives the amount in A above, the Company shall be
entitled to 50% of any additional net sales proceeds of the stock. Net sales
proceeds shall mean the gross proceeds received from the sale of the stock, less
reasonable brokerage commissions.
Final adjusted net sales proceeds will be wired to the Company within 7 days
from the final settlement of the sale of stock sold.
The outstanding balance owed on the revised 2007 subscription agreements at May
31, 2014 is $336,395.
Material terms of the subscription agreement received by the Company on June 22,
2010, for 400,000 restricted common shares at $0.75 per share (total value of
$300,000) are as follows:
Payment is due in full in 60 months.
At 24 months, the Company can demand at its option, monthly 1/36 payments on the
The Company has the option to charge simple annual interest of up to 4%.
The Company will provide downside protection of up to 30% of the stock price
The outstanding balance owed on the 2010 subscription agreement at May 31, 2014
For the three months ended May 31, 2014, the Company received stock subscription
payments of $5,000 and as of May 31, 2014, the Company had related party stock
subscriptions receivable aggregating $636,395 for the 2007 and 2010 agreements.
The following table summarizes the stock subscription receivable, by quarter, at
May 31, 2014:
Rights in the Amount of
New Proceeds of Downside
Total Amount Subscription the Resales Protection
Quarter Ended Total Balance Due Collected Agreements Collected Provided
February 28, 2013 978,854 - - - -
May 31, 2013 910,854 68,000 - - -
August 31, 2013 821,854 89,000 - - -
November 30, 2013 679,354 142,500 - - -
February 28, 2014 641,395 37,959 - - -
May 31, 2014 636,395 5,000 - - -
In summary, we believe our current cash reserves, the amounts we expect to
collect on our outstanding stock subscription receivables, future proceeds from
the issuance of our common stock and proceeds from the sale of current domain
names should be sufficient to enable us to operate for the next 12 months. In
the event that we are unable to collect our stock subscription receivables as
needed or raise additional capital through the sale of our common stock or sell
additional domain names on acceptable terms, we would be forced to reduce
operating expenses and/or cease operations altogether.
Critical Accounting Policies
The discussion and analysis of DigitalTown, Inc.'s financial condition and
results of operations are based on our financial statements, which have been
prepared in accordance with accounting principles generally accepted in the U.S.
The preparation of these financial statements requires management to make
estimates and judgments that affect the reported amounts of assets, liabilities
and expenses and related disclosure of contingent assets and liabilities.
Management reviews its estimates on an ongoing basis. Management bases its
estimates on historical experience and on various other assumptions that it
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities.
Actual results may differ from these estimates under different assumptions or
conditions. While DigitalTown Inc.'s significant accounting policies are
described in more detail in Note 2 to its financial statements, management
believes the following accounting policies to be critical to the judgments and
estimates used in the preparation of its financial statements:
Intangible Assets - Domain Names/Website Development Costs
Domain name costs are accounted for in accordance with the Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC 350-50) guidance
pertaining to Intangibles-Goodwill and Other, Website Development Costs.
Certain modules and components of the Company's overall website development are
ready for their intended use and the Company's resulting websites are currently
operational. Accordingly, the annual domain name renewal fees are currently
being amortized over one year and the purchase of any new domain names are the
only amounts being capitalized. Previously, during the infrastructure
development stage of its websites, the Company capitalized the purchase of new
domain names and the annual domain name renewal fees. Additionally, since the
ownership of each domain name can be renewed for a nominal renewal fee each year
prior to their expiration date, the useful lives of the domain names are deemed
to be indefinite and no amortization of the capitalized costs for the domain
names will be recorded.
Website development costs are accounted for in accordance with the FASB
Accounting Standards Codification (ASC 350-40) guidance pertaining to
Intangibles-Goodwill and Other, Internal-Use Software which requires that all
internal and external costs incurred to develop the internal-use software
necessary to operate the websites be capitalized. The guidance further states,
amortization should begin when an individual module or component of the overall
internal-use software is ready for its intended use. The cost of such module or
component will be amortized on a straight-line basis over its estimated useful
life, as determined by the Company, after taking into account the effects of
obsolescence, technology, competition and other economic factors. The Company
has components of its website development that are operational and are being
amortized on a straight-line basis over a three year life.
The Company measures and recognizes compensation expense for all stock-based
payment awards made to employees and directors on a straight-line basis over the
respective vesting period of the awards. The compensation expense for the
Company's stock-based payments is based on estimated fair values at the time of
the grant of the portion of stock-based payment awards that are ultimately
expected to vest.
The Company estimates the fair value of stock-based payment awards on the date
of grant using the Black-Scholes option pricing model. This option pricing model
involves a number of assumptions, including the expected lives of stock options,
the volatility of the public market price for the Company's common stock and
Recently Issued Accounting Pronouncements:
In July 2013, the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU") No. 2013-11: Presentation of an Unrecognized
Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax
Credit Carryforward Exists. The new guidance requires that unrecognized tax
benefits be presented on a net basis with the deferred tax assets for such
carryforwards. This new guidance is effective for fiscal years and interim
periods within those years beginning after December 15, 2013. We do not expect
the adoption of the new provisions to have a material impact on our financial
condition or results of operations.
In February 2013, the FASB issued ASU No. 2013-02, Comprehensive Income (Topic
220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive
Income, to improve the transparency of reporting these reclassifications. Other
comprehensive income includes gains and losses that are initially excluded from
net income for an accounting period. Those gains and losses are later
reclassified out of accumulated other comprehensive income into net income. The
amendments in the ASU do not change the current requirements for reporting net
income or other comprehensive income in financial statements. All of the
information that this ASU requires already is required to be disclosed elsewhere
in the financial statements under U.S. GAAP. The new amendments will require an
-Present (either on the face of the statement where net income is presented or
in the notes) the effects on the line items of net income of significant amounts
reclassified out of accumulated other comprehensive income - but only if the
item reclassified is required under U.S. GAAP to be reclassified to net income
in its entirety in the same reporting period; and
-Cross-reference to other disclosures currently required under U.S. GAAP for
other reclassification items (that are not required under U.S. GAAP) to be
reclassified directly to net income in their entirety in the same reporting
period. This would be the case when a portion of the amount reclassified out of
accumulated other comprehensive income is initially transferred to a balance
sheet account (e.g., inventory for pension-related amounts) instead of directly
to income or expense.
The amendments apply to all public and private companies that report items of
other comprehensive income. Public companies are required to comply with these
amendments for all reporting periods (interim and annual). The amendments are
effective for reporting periods beginning after December 15, 2012, for public
companies. Early adoption is permitted. The adoption of ASU No. 2013-02 is not
expected to have a material impact on our financial position or results of
In January 2013, the FASB issued ASU No. 2013-01, Balance Sheet (Topic 210):
Clarifying the Scope of Disclosures about Offsetting Assets and Liabilities,
which clarifies which instruments and transactions are subject to the offsetting
disclosure requirements originally established by ASU 2011-11. The new ASU
addresses preparer concerns that the scope of the disclosure requirements under
ASU 2011-11 was overly broad and imposed unintended costs that were not
commensurate with estimated benefits to financial statement users. In choosing
to narrow the scope of the offsetting disclosures, the Board determined that it
could make them more operable and cost effective for preparers while still
giving financial statement users sufficient information to analyze the most
significant presentation differences between financial statements prepared in
accordance with U.S. GAAP and those prepared under IFRSs. Like ASU 2011-11, the
amendments in this update will be effective for fiscal periods beginning on, or
after January 1, 2013. The adoption of ASU 2013-01 is not expected to have a
material impact on our financial position or results of operations.
Any statements contained herein related to future events are forward-looking
statements. Readers are cautioned not to place undue reliance on
forward-looking statements. DigitalTown, Inc. undertakes no obligation to
update any such statements to reflect actual events.
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